Can “regtech” ease compliance challenges?

Technology means much more to banking than putting a bank in the palm of one's hand.

There are two key forces at work in the 21st century that won’t change for most firms, and certainly not financial companies: technology and regulation.

It should be obvious that technology is a fundamental, if not the most fundamental, driver of business success. More and more institutions are making technology a priority as well: According to a 2016 survey of chief information officers at banks, credit unions, and other financial companies, nearly 70% planned to spend more on technology. Moreover, in 2017 banks alone are expected to have invested more than $20 billion in technology.

In the financial services business, as in many businesses, technology encompasses everything from the customer interface, to the back office, to compliance with government requirements. If properly targeted, technology will improve these functions and ensure efficiencies at the same time.

Convergence of business and technology

Indeed, one way to crystalize this business imperative of the 21st century is to embrace the reality that we are all technology companies now.

Just as important is to accept that regulation is not going away. While it may appear that the U.S. government is beginning to rationalize recent regulatory changes, the regulatory responsibility the industry faces will not retract, due almost entirely to the growing complexity of the financial services sector.

The rules that guided more than 150 years of financial history in America and across the globe have been imprinted by new regulations and new regulatory agencies—and not because of the 2007 financial crisis or even the Great Depression.

Rather, it is due to the increasing complexity of finance itself and finance’s growing impact on the personal and business lives of individuals as well as companies and their customers.

The mounting complexity of finance and its increasing importance in our society will not be reversed. Indeed, technology, globalization, and the size of institutions virtually assure this.

So how best to deal with both of these business imperatives—regulation and technological change? Bring them together. Technology must be harnessed to solve regulatory problems more effectively and efficiently.

To do that, one must first understand what needs to be done from a regulatory perspective and why. Then one must apply the appropriate technologies to the obligations in an effective way. This too requires expertise, both in terms of the subject matter and the technology.

AML/BSA challenge points the way

One example where technological solutions are needed is transaction monitoring in the anti-money-laundering space. Global money laundering transactions are estimated to be in the trillions of U.S. dollars. Yet, according to the United Nations Office on Drugs and Crime, less than 1% of global illicit financial flows are currently seized by authorities.

Today those important responsibilities require tens of thousands of individuals searching for suspicious transactions. We all know that however skilled the individuals are, there will be some non-trivial number of mistakes. Giving these compliance professionals advanced technology-driven tools will not just increase the professionals’ accuracy, but also allow them to be more efficient.

Surveillance is another area where institutions can benefit from advanced technology. It can be used to catch abnormalities and identify troubling trends, giving the institution the knowledge needed to put it to a stop at an early stage.

The win-win that technology offers in AML and surveillance is indicative of the many areas where there’s a need for technological solutions. Success serves not just financial companies and their customers, but the government as well. Government wants solutions that improve quality.

How much tech could help

The potential of technology to improve quality was highlighted in a recently published Financial Stability Board report, Artificial Intelligence and Machine Learning in Financial Services. The document, published in November, discussed the “substantial promise” of artificial intelligence and machine learning applications. Further, it said such applications “can help improve regulatory compliance and increase supervisory effectiveness.”

And if such solutions also increase efficiencies so that an enterprise can utilize resources more effectively, the financial system will be stronger for it.

About the author

Eugene Ludwig, a former Comptroller of the Currency, is founder and CEO of Promontory Financial Group, an IBM Company.